Key themes for the week ahead – Central bank policy decisions, US CPI, and ongoing geopolitical risk
Recap from last week…
Central banks are moving towards a tightening stance on monetary policy. The FOMC minutes confirmed that the Board will move “expeditiously” to increase the FFR to neutral – with one or more 50bp increases at coming meetings possible. After moving the policy rate to neutral, “a move to a tighter policy stance could be warranted”. QT is likely to be announced at the May meeting and may commence shortly thereafter (roll-off capped at approx. $95bn/mth). What is unclear is how and how much QT will contribute to the tightening of financial conditions as rates move to neutral and possibly beyond.
The FOMC minutes noted concerns over inflation expectations becoming unanchored. In a speech earlier in the week, Governor Brainard (usually more dovish), said that dealing with inflation was ‘paramount’. Rates sold off across the curve after that speech, but more notably at the long end. By the end of the week, the entire curve had shifted up and steepened slightly.
US momentum remained robust – the ISM PMI for Services in Mar expanded at a faster pace, consumer credit growth of +$42bn in Feb was the largest $ growth in the series back to the start of 2000, and initial claims remained below 200k. Mortgage applications continued to decline.
The RBA left policy settings unchanged but made a significant shift in its guidance. The Board removed ‘we are prepared to be patient’ from its statement. This suggests that hikes may now be on the table. After the meeting, rate hike calls were brought forward to Jun and even May this year. Aussie rates moved higher throughout the week. The Aus labour market survey for Mar is out this week, and the unemployment rate is expected to fall below 4% which has been an important marker for the RBA.
The week ahead...
US CPI for Mar is expected to accelerate again on higher energy and commodity prices. The headline CPI growth is expected to increase to +8.5% in Mar from +7.9% in Feb. Monthly inflation is expected to increase to +1.2% in Mar from +0.8% in Feb. Retail sales ($ value) for Mar are expected to increase by +0.6% and prelim consumer sentiment for Apr is expected to fall further to 58.8. Fed Governor Brainard and other Fed presidents will speak this week.
Other consumer inflation reports: China, the UK, and final Mar CPI for France, Italy, & Germany.
The RBNZ and the BoC are both expected to increase rates at meetings this week. Both are likely to increase rates by 25bps this week, with the BoC more likely to increase by 50bps.
The ECB is likely to keep policy settings unchanged. There may be an assessment of the acceleration in Mar Euro area inflation data. The minutes last week reflect some differences among members on the need to act quickly on inflation and on ending the APP unconditionally. The decision in Mar to taper the APP was important to provide optionality on future interest rates changes. But the decision to end the APP net purchases in Q3 remains conditional. Adjustments to key interest rates “would take place “some time after” the end of net asset purchases of the APP”. It was reported last week that the ECB has started working on a “crisis tool” to manage bond yields after the end of the APP. This may be discussed further at this meeting.
This week, the US Treasury will auction and settle approx. $200bn in ST Bills with a net paydown of -$22bn.
The US Treasury will also auction approx. $100bn in Notes and Bonds which will settle next week.
Approx. $43bn in ST Bills, Notes, Bonds, and TIPS will mature on the Fed balance sheet this week and will be rolled over.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
